In a previous blogpost, I wrote about how the phrase “settled without admitting or denying wrongdoing” should be the mantra of the Securities and Exchange Commission (SEC). So many traders, hedge fund managers, bankers, and corporations have avoided criminal charges by simply paying a monetary settlement to the SEC to get off scot-free and go back to working in financial markets, often times becoming multiple-repeat offenders. Most often, the settlement is a negligible slap on the wrist and does little to prevent future fraud. To many financial players and traders, the SEC is a joke, easily paid-off when they happen to catch a slip-up. The so-called top watchdog of financial markets is an embarrassment to people who trust and believe the SEC is actually protecting their interests against fraud.

The SEC recently pursued the same “settled without admitting or denying wrongdoing” settlement with Citigroup after the firm allegedly hand-picked securities to be included in a billion-dollar mortgage securities fund without telling investors, claiming that the securities were being chosen by an independent entity. Citigroup then sold those same securities short making $160 million for itself and $700 million in losses for the investors.

Citigroup and the SEC had agreed to settle for $285 million and of course neither admit nor deny wrongdoing, but federal judge, Jed Rakoff threw-out the settlement stating that the “judgment is neither fair, nor reasonable, nor adequate, nor in the public interest.”

Judge Rakoff ruled that settling without admitting or denying wrongdoing in this case creates substantial potential for future abuse. He went on to state that the SEC’s practice of allowing such settlements without establishing facts of wrongdoing is a disservice to the public interest. The ruling is a wake-up call to firms and individuals promulgating fraud and to the SEC who is complicit in enabling fraud to occur.

“Purely private parties can settle a case without ever agreeing on the facts, for all that is required is that a plaintiff dismiss his complaint. But when a public agency asks a court to become its partner in enforcement by imposing wide-ranging injunctive remedies on a defendant, enforced by the formidable judicial power of contempt, the court, and the public, need some knowledge of what the underlying facts are: for otherwise, the court becomes a mere handmaiden to a settlement privately negotiated on the basis of unknown facts, while the public is deprived of ever knowing the truth in a matter of obvious public importance.”

Hopefully this becomes the standard and forces the SEC into actually seeking the facts of fraud to prevent future abuses instead of simply agreeing upon a fine that merely funds the SEC’s own operation of pretending to be an enforcer of law. There have been far too many fraudulent practices that have gone unpunished. The public deserves justice and the truth, not widespread abuse by bankers and their regulators.

Judge Rakoff writes in the ruling:

“An application of judicial power that does not rest on facts is worse than mindless, it is inherently dangerous. In any case like this that touches on the transparency of financial markets whose gyrations have so depressed our economy and debilitated our lives, there is an overriding public interest in knowing the truthâ€¦ [The SEC] has a duty, inherent in its statutory mission, to see that the truth emerges.”

James Groth is a research associate at Reason Foundation, a nonprofit think tank advancing free minds and free markets. Prior to joining Reason, where he works on monetary policy reform and financial regulation, he worked as a proprietary trader and asset manager. Groth holds a B.A. in economics from Tufts University.